ASEAN Logistics - Full Steam Ahead

M&A and investments in the logistics sector in Asia, and particularly in ASEAN, have steadily been on the rise with valuations which are often at a premium to prevailing market multiples. Consolidation is definitely the buzzword in the global logistics industry. Driven by globalisation, increasing customer demand and a highly competitive market many logistics players have taken the M&A route to expand geographical coverage and provide more integrated solutions along the entire supply chain.

In this edition of TaipanOracle we take an in-depth look at the drivers behind the logistics growth story in ASEAN along with the associated challenges and some niche investment themes which can be explored by investors.

Recent Deals

2015 has been marked by mega-deals in the logistics sector in Asia and at valuations which have forced analysts to take notice as they have been at a premium to the already lofty benchmarks.

Japan Post Holdings announced the acquisition of Australia’s Toll Holdings for USD 5.1 billion paying a 49% premium over the prevailing market price (~11.3x EV/EBITDA). Combined, the two would be the world's fifth-largest logistics group after FedEx Corp in terms of revenue

Franklin Templeton PE acquired a minority stake in Indo Trans Logistics Corporation (ITL), one of the top 3 logistics companies in Vietnam. ITL offers air, sea, road and rail transport services, warehousing and last mile delivery riding on the e-commerce boom that has triggered demand for logistics facilities in the Indochina region

Shareholders of Singapore’s CWT Group are also reportedly initiating a sale process on the back of strong interest from buyout groups, at a premium to the present valuation of 11.5x P/E. CWT is one of Singapore’s largest logistics companies with operations across 90 countries

Key drivers for growth

ASEAN, if considered a nation, would be the 7th largest economy in the world with a combined GDP of USD 2.4 trillion. With 10 member nations and a total population of over 626 million relatively young people, the region is developing into a pivotal marketplace led by an emerging middle class with growing spending power. ASEAN also finds itself in the spotlight as the deadline (31 December 2015) for the launch of the ASEAN Economic Community (AEC) approaches – the AECs deliverables include developing an integrated production space with free movement of goods, services, and skilled labour.

Low cost outsourcing power bloc: ASEAN is slowly but steady taking centerstage as China’s growth slowdown becomes real. China had for long been regarded as the manufacturing powerhouse in the region with global supply chain investments aligned accordingly. However, increasing shortages in skilled labour, rising wages and a strategic shift towards domestic consumption has resulted in ASEAN garnering an increasing share of investment for outsourced manufacturing. This shift in manufacturing has triggered a mad scramble to set up logistics and supply chains for the movement of goods from factories in ASEAN to customers worldwide.

The new middle class: The ASEAN countries represent a collective GDP expansion exceeding 300% since 2001, and have outpaced the global growth average for the past 10 years. A growing middle class with a skew towards young tech-savvy consumers has caught the attention of consumer as well as luxury foreign brands. E-commerce has boomed in the region and with last-mile delivery infrastructure severely lagging smartphone and internet penetration, several logistics players are lining up large investments for the region to solve these constraints.

Fixing inefficiencies in the Supply Chain: Supply chains and logistics infrastructure in ASEAN countries, largely with the exception of Singapore, has been historically plagued by lack of planning and investment. Use of smart planning tools like Transportation Management Systems and Global Positioning Systems is not pervasive and often the high initial cost of implementation deters smaller logistics services firms in the region from investing in these technologies. Paucity of skilled human capital, training resources, education and research compound the overall inefficiency in the system. These ‘gaps’ however, only add to the lure for foreign strategic investors as they see an opportunity not only in the macro-economic landscape and favourable demographics but also in improved margins from fixing inefficiencies in technology and talent.

The answer lies in 3PL: While the end goal is to build seamless cross-border supply chains, near term logistics bottlenecks need creative solutions which are often provided by third-party logistics providers (3PL). Transport Intelligence, a global logistics consulting firm, has identified Panalpina, Toll, Sinotrans and UPS as leaders in the region. However, there remains opportunity for committed regional players to identify and integrate multiple routes to market and build innovative last-mile logistics models. ASEAN consumers have traditionally been very price-sensitive and lean-low-cost local service providers can capture the value conscious domestic businesses

Challenges for the logistics sector in ASEAN

Investing in ASEAN supply chains presents a compelling opportunity but it comes with its fair share of challenges. ASEAN is not a homogenous region and while countries like Philippines, Indonesia and Vietnam are rapidly upgrading their infrastructure, others like Myanmar, Cambodia and Laos continue to remain laggards.

The region continues to face threats of disruptions from terrorism, natural disasters like typhoon, tsunami and catastrophic flooding, and poor infrastructure and power outages. Complex systems around bureaucracy, red-tape and corruption often result in heavy documentation, high import taxes, and delays which act as strong deterrents to entry for foreign investors.

Road quality and capacity varies greatly across ASEAN countries – while roads in Singapore are fully paved, Cambodia and Laos have less than 10% paved highways. About 98% of the 38,400-mile Trans-Asian Highway has been built, but critical links are still missing and the quality of some roads is questionable.

While there is a need to tailor supply chains to individual Asian markets, it is necessary to build competitive advantages and generate efficiencies from coordinating regional operations from established operational and technical hubs overseeing supply chain networks in Asia.

Investment themes for the sector

We briefly introduce a few niche themes which can be explored for investing in the logistics sector in ASEAN.

3PL Services: 3PL players provide solutions for managing local inefficiencies and providing seamless transportation and supply chain services to their clients. These players command higher margins for solving constraints and also tackling integration and bureaucratic challenges on-ground. As more and more foreign companies eyes ASEAN as a unified consumer and manufacturing bloc, the role played by 3PL service providers will only increase in future.

Cross-Border Trucking: One of the core themes of the AEC is increasing intra-ASEAN trade and reducing trade barriers. This presents a compelling opportunity for cross-border road transport companies as major linkage and arterial plans move beyond the drawing board stage. ASEAN countries are drawing inspiration from China’s New Silk Road plan to improve connectivity and provide a direct passageway for its goods to consumer markets. Similar efforts to seamlessly connect Vietnam, Laos, Thailand, Malaysia and Singapore will reap immense benefits in future for international trucking businesses.

Origin Cargo Management & Buyer Consolidation: While focus has been on larger ASEAN countries like Singapore, Indonesia and Thailand for logistics investments, their smaller counterparts in the Indochina region have been establishing their credentials as quality ‘sweatshops’ especially for the global textile market. Global brands like Nike, H&M, Adidas and Uniqlo have set up factories in Cambodia and others are evaluating their options. As manufacturing gets a boost in the region, the demand for Origin Cargo Management and Buyer Consolidation will only increase as SME suppliers look to streamline their shipping costs. Tariff reduction through AFTA will further provide a shot in the arm to major garment manufacturers to boost their production.

Project Cargo Logistics: Infrastructure in ASEAN countries continues to lag but with the growth in their economies, the respective governments are looking to further invest in infrastructure. The recent Asian Infrastructure Investment Bank can hopefully also be a key lender to provide sustainable loans to these countries to kick off new projects. A key segment in the logistics industry which can benefit from the focus on infrastructure is Project Cargo Logistics. Handling Project Cargo takes special care, expertise and attention as typically consignments are time bound and of considerable valuable. Companies carving out a track record in this segment will continue to gain from the infrastructure boom in ASEAN.

Have a chat with our M&A Advisory & Research team to discuss regional trends and identify investment opportunities for your business.